The Financial Services Authority needs to improve the quality of its people to take on the additional powers the Chancellor wants it to have to prevent bank failures, the British Bankers' Association said yesterday.
Alistair Darling intends to give the FSA the ability to seize the retail deposits of a failing bank to ensure that a Northern Rock-style run does not take hold. He also wants the FSA to have greater powers to demand information about banks' liquidity. Current legislation treats banks the same as other companies, putting savers' deposits at risk if a bank goes bust.
A new insolvency regime for banks has been widely trailed by Mervyn King, the Governor of the Bank of England, who sees ring-fencing of retail deposits as an essential measure to prevent further mass withdrawals from banks in trouble. Mr Darling revealed this week that he intended the FSA and not a separate agency to have the power to intervene.
The BBA said it broadly welcomed Mr Darling's proposals. But the industry lobby group stressed that the FSA must have the right calibre of people in place to make the checks on banks' liquidity. "It does need to upskill and to decide where it puts its best resources," Simon Hills, the BBA's executive director of prudential capital and risk, said. "Liquidity management by banks is a complex area."
The FSA has accepted that it should have monitored Northern Rock's liquidity position more closely before the mortgage lender hit a funding crisis that almost made it go bust. The Government had to step in and the Bank of England has now lent the bank more than 25bn.
Peter Snowden, a partner at the law firm Norton Rose who covers financial regulation, said: "There are going to have to be clear criteria as to when the FSA takes action. The risk is that you get burnt once and then you rush in too quickly the next time."
Vince Cable, the Liberal Democrats' treasury spokesman, said Mr Darling's measures did not go far enough to control banks after lenders binged on a debt boom. "What is missing from the Government's approach is some indication that it understands the need to prevent our liberalised banking system from repeatedly running into the same problems as Northern Rock.
"This means, for example, having capital adequacy requirements which reflect the state of the economic cycle, to prevent the wild booms and busts in lending that we have seen in the property market."Reuse content